Three health tech stocks for your portfolio

The healthcare technology sector has seen its share of highs and lows over the past couple of years and stocks are now well off their highs. That makes for both buying opportunities for investors and potential take-out targets for other interested companies, according to Stifel GMP analyst Justin Keywood, who on Thursday delivered a sector report to clients pointing to three names that bear particular attention.

It’s been an up-and-down period for healthcare stocks generally and health tech in particular, a space that was a fan favourite early on in the pandemic as investors took to up-and-coming names that served the growing interest in ideas like virtual and digital-first platforms.

But that trend has seen a major pullback this year. By the numbers, the S&P/TSX Healthcare index is down a huge 47 per cent year-to-date compared to the broader S&P/TSX which is down 13 per cent.

Yet Keywood says the lower valuations in the space are now attracting corporate M&A interest where the aim is to acquire good, recession-proof healthcare assets at an attractive price. Keywood pointed to Telus’ announcement in June to acquire mental health and wellbeing platform LifeWorks as a potential harbinger of things to come.

“The recent $2.8-billion announced transaction of LifeWorks by Telus and take-out interest of 1Life Healthcare from several potential suitors helps illustrate a developing a trend and is supportive of a better valuation for the sector. We have no knowledge of any M&A negotiations or discussions but we highlight names from our 22-coverage universe that we believe could have take-out potential,” Keywood wrote.

On that front, Keywood pointed to omni-channel digital health company WELL Health Technologies (WELL Health Technologies Stock Quote, Charts, News, Analysts, Financials TSX:WELL), mental health and well-being SaaS platform LifeSpeak Inc (LifeSpeak Stock Quote, Charts, News, Analysts, Financials TSX:LSPK) and pharmacy consolidator CareRx (CareRx Stock Quote, Charts, News, Analysts, Financials TSX:CRRX).

On WELL Health, Keywood said there are four key areas to his investment thesis, pointing to WELL’s potential to acquire and/or build more health clinics to strengthen its platform, its demonstrated success in adding valuable SaaS revenue via M&A, its ability to reap the benefits of now over one million patient visits on an annualized basis to test and further develop its healthcare tech and WELL’s organic growth potential.

On organic growth, Keywood wrote, “WELL can roll out its acquired and developed technologies across Canada and into the U.S., leading to possible accelerated organic growth. The company can also increase organic growth at its clinics by adding additional doctors to fill extra available capacity that now includes virtual visits.”

“WELL has created a unique business model with ~20 primary care and related clinical assets that offers in-person and telehealth services, a ~15 per cent EMR market share in Canada, important cyber security infrastructure and more recently announced entry into the U.S. telehealth market. We also see WELL as an early stage consolidator, similar to Enghouse, Descartes and Constellation Software but focused in health-tech. The pipeline for M&A continues to be wide with 100 assets being evaluated and around 10 in an LOI stage,” he said.

Next up, Keywood said Telus’ LifeWorks buy shows a general interest in entering the employee benefits and wellness space, especially with a focus on mental health services. To that end, LifeSpeak offers a unique, asset-light, one-to-many platform that is 100 per cent virtual and at a relatively low cost to employers, according to the analyst. The stock collapsed in May and is now down 81 per cent over the past three months, with Keywood gesturing to some confusion surrounding LifeSpeak’s contract renewal process with its largest customer.

But the pullback has put LSPK at an attractive 2x 2023 sales versus its peers at 5x, Keywood said, while the company continues to ramp up in a sector (automated mental health services) that’s currently experiencing severe staffing strain.

“LifeSpeak customers and HR experts that we spoke with rate the platform high at an average of 9/10, demonstrating customer stickiness, but the platform was also mentioned as unique without a comparable competitive alternative. Exceptional customer service was described as well and that has become increasingly critical as staffing shortages in the mental health space persist. Combined with high margins at near 40 per cent EBITDA in 2021, we see much to like about LifeSpeak as global expansion initiatives ramp up and an M&A program commences,” Keywood wrote.

Finally, with CareRx, Keywood thinks the company stands as a potential target due to its valuation currently at 0.7x sales and 7x EBITDA in a pharmacy space where assets have sold for 2x sales and above. The analyst said CareRx is the leader in the Canadian institutional pharmacy industry for long-term care and retirement homes with about 22 per cent market share where about 69 per cent of the market is still highly fragmented.

“A takeout of the business could result in material market share with ample room for growth. At the same time, it opens up the opportunity to optimize the company’s capital structure, which currently has $80mm in debt with 7.5 per cent to 10.5 per cent interest rates,” Keywood wrote.

“While the stock has dropped to 2020 levels, the business has increased its market share by ten per cent over the past two years, progressing from $164 million sales to $378 million expected for 2022. The recent acquisition of Rubicon Pharmacies in Canada at 12x EBITDA also supports better valuation. If no M&A were to materialize for CareRx, we still see a solid investment case at 7x EBITDA, given the strategic long-term nature of the asset, leading market share and secular tailwinds,” he said.

WELL Health Technologies

Market cap: $708.8 million

Stifel GMP rating: “Buy”

Target price: $13.50

Projected 12-month return to target: 315 per cent

LifeSpeak

Market cap: $57.9 million

Stifel GMP rating: “Buy”

Target price: $2.75

Projected 12-month return to target: 133 per cent

CareRx

Market cap: $193.0 million